As many public companies ready themselves for their annual shareholders’ meetings for the upcoming proxy season, boards of directors are evaluating weighty governance issues of relevance to their respective firms. In the wake of the 2008 financial crisis, corporate governance has taken on a much higher priority, creating issues that are of particular importance to public companies, which are now being held to a higher standard.

Just before the Christmas holiday, I interviewed Gary Retelny, president of Institutional Shareholder Services (ISS), one of the two largest proxy advisory firms in the U.S., to discuss this proxy season’s most pressing issues. This is the focus of this issue’s cover story. During our discussion, Retelny candidly addressed the issue of whether ISS carries too much weight when it comes to proxy votes. The Securities and Exchange Commission (SEC) and other groups have raised questions about the fairness of its recommendations and decision-making.

During opening remarks at a recent roundtable event in Washington, D.C., SEC Commissioner Michael Piwowar said: “In addition to the lack of competition in this market, I am also concerned by the potential over-reliance on proxy advisory firms. I see many similarities between the current situation with proxy advisory firms and the pre-crisis situation with credit rating agencies, including an unhealthy over-reliance on their recommendations by investors.”

Yet, Retelny maintains that, ultimately, ISS’s clients decide how their votes will be cast. “We provide information, and we work very hard to assure that information is objective, transparent and accurate,” he says.

Meanwhile, in an October petition to the SEC, Edward Knight, general counsel of NASDAQ OMX (the public company that owns NASDAQ) points out: “There is evidence that the firms not only increase the costs of being a public company, but also create disincentives for companies to become public in the first place.” Specifically, Knight calls on the SEC to “require public scrutiny of the models and methodologies on which the firms rely to make recommendations and mandate disclosure of all potential conflicts of interest.”

The inquest into whether the lack of competition in the proxy advisory space—as well as the power proxy advisory firms yield—will no doubt continue to be on the SEC’s radar, as well as ours.

While there is an absolute need for an external perspective that articulates the range of environmental factors facing boards, ultimately these decisions must come from within. Adulteration of that fundamental truth poses too large a risk for public companies and their shareholders to succumb to the whims of conflicting interests.

Editor in Chief

Erin E. Harrison

Erin E. Harrison is the Editor in Chief of InsideCounsel magazine. Harrison’s professional background includes extensive expertise in both print and online media, highlighted by...